Determining ‘sensitive period’ of insider information

Insider trading in securities has been a focus of investigation and crackdown by securities regulatory authorities around the world, but difficulties in the identification criteria remain. This article discusses determination criteria for the ‘sensitive period’ of inside information, based on latest administrative reconsideration cases handled by the China Securities Regulatory Commission (CSRC).

Key elements of insider trading

The amended Securities Law came into effect on 1 March 2022, with article 53 stating that, “a person who is in the know of insider information on securities trading, and a person who has illegally obtained such insider information, shall not purchase or sell the securities of the company concerned, or divulge such information, or advise others to purchase or sell such securities before the insider information is made public”.

According to administrative reconsideration decisions published on the CSRC website, insider trading involves the following three key elements:

(1) Subject: a person who is in the know of insider information on securities trading and a person who has illegally obtained such insider information;

(2) Timing: the sensitive period of insider information; and

(3) Action: using insider information to purchase or sell securities for oneself, or divulging insider information, or advising others to purchase or sell securities based on the insider information.

Sensitive period

According to article 5 of the Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Laws in Handling Criminal Cases Related to Insider Trading and Leakage of Insider information, “the sensitive period of insider information is defined as the period from formation of the insider information to the time it is made public”. Therefore, the sensitive period of insider information must be determined based on three factors, namely the insider information, the time of its formation, and time of its publication.

(1) Insider information. Article 52 of the Securities Law provides that “information not yet made public in the course of securities trading activities that relates to the operations or finances of an issuer or that has a significant impact on the market price of such issuer’s securities is insider information. The material events set out in articles 80(2) and 81(2) of this law shall be insider information”. Specifically, insider information in article 80(2) mainly covers undisclosed material events of listed companies or companies with shares that are traded on other national securities trading venues approved by the State Council. Insider information in article 81(2) mainly covers material events unknown to investors that may have a significant impact on the trading price of listed corporate bonds.

(2) Time of formation. Article 5(2) of the interpretation provides that “the time of occurrence of a ‘material event’ as set out in article 67(2); the time of formulation of a ‘plan’ or “scheme” as set out in article 75 of the Securities Law; and the time of formulation of a ‘policy’ or ‘decision’, as prescribed in article 85(11) of the Regulation on the Administration of Futures Trading, should be identified as the formation time of insider information. Article 5(3) of the interpretation further provides that “the initial time of a motion, plan, decision or execution made by a proposer, planner, decision maker or executor who influences the formation of insider information shall be identified as the time of formation of the insider information”.

(3) Publication time. Article 86 of the Securities Law provides that “information as prescribed by law to be disclosed shall be published through the media designated by the securities regulatory authority of the State Council”. The publishing time of insider information by newspapers, websites and other media designated by the CSRC is the publication time of such insider information. Article 5(4) of the interpretation provides that “the publication of insider information shall refer to the disclosure of the insider information on newspapers, websites or other media designated by the securities and futures regulatory authorities of the State Council”.

CSRC approach

According to the information publicly available on the CSRC website, five administrative reconsideration decisions involving disputes over determination of the sensitive period of insider information were awarded in 2021. These were Administrative Reconsideration Decisions No. 29 (Liu Hong), No. 33 (Yu Yun), No. 47 (Zuo Youqiang), No. 62 (Beijing Blue Sea Strategy Capital Operation Centre, Su Sitong) and No. 79 (Zeng Zheng).

Based on analysis of the above-mentioned five cases, the author preliminarily understands the CSRC’s approach to determining the sensitive period of insider information as follows:

(1) The main basis for determining the sensitive period of inside information is article 5 of the Interpretation;

(2) The formation of insider information is a continuous dynamic process. Therefore, determination of the formation time of insider information does not necessarily require that the insider information has been established to a basic degree. The initial time of a motion, plan, decision or execution made by a proposer, planner, decision maker or executor who influences the formation of insider information could be deemed as the time of formation of the insider information;

(3) The time of formation of insider information is closely related to the identification of the motion proposer, planner, decision maker or executor who influences the formation of insider information. In general, it is not difficult to identify the decision makers who influence the formation of insider information. But as for the planners or executors, the identification will need to be made on a case-by-case basis; and

(4) The publication time of insider information depends on the time of disclosure of the main content of the insider information. Disclosure of partial aspects of the insider information does not affect its undisclosed status.

Qiu Li is a partner at Zhilin Law Firm